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February 14, 1983

NORTH SIDE DEPOSIT BANK, DEFENDANT; U.S., Plaintiff v. Liberty Vehicle Leasing, Inc., North Side Deposit Bank, Defendants

The opinion of the court was delivered by: MCCUNE


 Barron P. McCUNE, District Judge:

 This is a federal tax case. The government asserts liability against North Side Deposit Bank (North Side) for unpaid withholding taxes (WT), 26 U.S.C. §§ 3401, et seq., and Federal Insurance Contributions Act (FICA), 26 U.S.C. §§ 3101, et seq., of Liberty Vehicle Leasing, Inc. (Liberty), for the third quarter of 1974, the second, third and fourth quarters of 1975, and the first quarter of 1976; and the Federal Unemployment Tax Act (FUTA), 26 U.S.C. §§ 3301, et seq., taxes of Liberty for 1975 and 1976. The government has filed two suits, alleging alternate theories of North Side's liability: at No. 80-487 (violations) of sections 6672, 3505(a), and 3505(b) of the 1954 Internal Revenue Code, 26 U.S.C. §§ 6672, 3505(a) and (b); and at No. 81-551, North Side's tortious conversion or breach of constructive trust of Liberty's tax liened assets. The cases were consolidated and after a non jury trial and a review of the applicable law, we find North Side liable for most of the taxes claimed by the government pursuant to the claim of tortious conversion, and the provisions of 26 U.S.C. § 6672, as amended.


 This dispute arises out of the unfortunate financial condition of a family owned trucking company, deeply in debt to a small bank, which was struggling to keep the debtor afloat until it could be repaid. In the process, the bank became involved in the debtor's affairs.

 The Internal Revenue Code assiduously guards withholding and FICA and unemployment taxes. Three of the provisions of the Code are said to be applicable here in the first suit filed at No. 80-487, §§ 6672, 3505(a) and 3505(b).

 It is important to observe that these taxes are assessed by quarters of the year. It is assumed that it is well known that employers withhold these taxes and send them to the government at the end of each pay period, or to a depository bank.

 Section 6672 provides that "any person required to collect, truthfully account for, and pay over any tax imposed by this title, who wilfully fails to collect such tax or truthfully account for and pay over such tax or wilfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable for a penalty equal to the total amount of the tax evaded or not collected or not accounted for and paid over."

 Under Section 6672 the taxes in question are those for the Third and Fourth quarters of 1975, and the First quarter of 1976.

 The same taxes are claimed under the provisions of Section 3505(a), plus the taxes for the Second quarter of 1975.

 That section reads as follows:


For purposes of sections 3102, 3202, 3402 and 3403 if a lender, surety or other person, who is not an employer under such sections with respect to an employee or group of employees, pays wages directly to such an employee or group of employees, employed by one or more employers, or to an agent on behalf of such employee, or employees, such lender, surety or other person shall be liable in his own person and estate to the United States in a sum equal to the taxes (together with interest) required to be deducted and withheld from such wages by such employer.

 The same taxes, plus the taxes for the Second quarter of 1975 are claimed under Section 3505(b).

 Section 3505(b) reads as follows:


If a lender, surety or other person supplies funds to or for the account of an employer for the specific purpose of paying wages of the employees of such employer with actual notice or knowledge (within the meaning of section 6323(i)(1) that such employer does not intend to or will not be able to make timely payment or deposit of the amounts of tax required by this subtitle to be deducted and withheld by such employer from such wages, such lender . . . shall be liable in his own person and estate to the United States in a sum equal to the taxes (together with interest) which are not paid over to the United States by such employer with respect to such wages. However, the liability of such lender . . . shall be limited to an amount equal to 25% of the amount so supplied to . . . such employer for such purpose.

  The taxes claimed for the Third quarter of 1975 were assessed on February 23, 1976, in the amount of $24,194.67.

 For the Fourth quarter of 1975, the taxes were assessed on April 5, 1976, in the amount of $39,592.24.

 For the First quarter of 1976, the taxes were assessed on May 11, 1976, in the amount of $49,974.30.

 For the Second quarter of 1975 (added under § 3505(a) and (b)), the taxes were assessed on August 11, 1975, in the amount of $82,754.41.

 Total assessments -- $196,515.62.

 Under §§ 6672, 3505(a) and 3505(b), the government generally claims that North Side was in such control of Liberty that North Side is liable for the taxes just as Liberty was liable; that those sections of the code were designed to prevent the loss of such taxes where employers become overextended and borrow money to meet payroll, so Northside was a person required to collect taxes, or paid wages directly or was a lender who knew that the borrower could not pay the taxes.

 It is observed that §§ 6672, 3505(a) and 3505(b) are alternate theories seeking recovery of the same taxes except for the second quarter of 1975 claimed under 3505(a) and (b) only.

 In the second suit at 81-551, the government asserts alternative theories, i.e., that Northside is liable for tortious conversion of property subject to federal tax liens, or is liable for breach of trust with respect to property of Liberty which was subject to prior federal tax claims.

 (At No. 81-551, default judgment was entered against Liberty, a joint defendant.)

 This suit, 81-551, deals with the Third quarter of 1974 in the amount of $15,234.58, assessed on April 7, 1975; the Second quarter of 1975, in the amount of $82,754.41 (already claimed in the first suit); the Third quarter of 1975, in the amount of $24,194.67 (already claimed in the first suit) and the Fourth quarter of 1975 and the First quarter of 1976, as well as FUTA taxes for 1975 and 1976.

 (It is observed that if the $15,234.58 is added to $196,515.62, the total is $211,750.20, which is all the government claims except for the unemployment compensation taxes spoken of later in the amount of $1,171.39. The total claim is $212,921.59 with interest.)

 It is alleged that the government filed its notice of federal tax lien for the Third quarter of 1974 on September 8, 1975; for the Second quarter of 1975 on October 8, 1975; for the Third quarter of 1975 on April 7, 1976, for part and on May 7, 1976, for part of the Fourth quarter of 1975 on April 12, 1976, for part and on May 7, 1976, for part; for the First quarter of 1976, on May 20, 1976, for part and on July 9, 1976, for part.

 It is alleged that Northside collected Liberty's accounts receivable, under hauling contracts, from November 1, 1975, onward to December 31, 1975, in the amount of $359,039.23; from January 1, 1976, to February 29, 1976, in the amount of $396,399.55, and from March 1, 1976, to the date of trial in the sum of $105,757.52.

 In addition, it is alleged that Northside seized the property of Liberty on February 28, 1976, and recovered over $103,000.00 in liquidation of it.

 It is alleged that on or about November 18, 1975, Northside ordered and received a report which showed the first two liens and Northside therefore had actual notice of them.

 Here § 6323(c) comes into play. It places the bank's loans ahead of the federal tax liens on accounts receivable and inventory which was acquired by the borrower within 45 days of the date of filing the tax liens. The government argues that although Northside was secured by a commercial financing agreement, it did not have a perfected lien on any of Liberty's accounts receivable which came into existence more than 45 days after the federal tax liens were filed. The government contends that many of the accounts receivable came into existence and into the bank's hands after the 45 days had expired. It will be necessary as we proceed, to examine the filing dates of the tax liens and the accounts receivable which matured 46 days thereafter and which quarters are of concern. We will attempt to deal with quarters. We do not deal with interest or penalties.

 The same argument is applied to the liquidation of the property of Liberty by Northside on or after February 28, 1976. It is alleged that Northside has the burden of proving the priority of its liens over the federal tax liens and as to much of the property liquidated no such showing was made, e.g., antifreeze, fuel, truck parts and bottles. The government claims the $103,000.00 to satisfy the liens for certain quarters.

 Finally, the government argues that Northside is liable for the taxes in question for its breach of trust with respect to the same property because the government had tax liens on it which were entitled to priority. Since the bank favored its own position, it is said to be guilty of breach of trust. The theory is that a constructive trust arose in favor of the government.

 The government seeks only one recovery even though various alternate theories for recovery are advanced. As stated above, the total recovery sought for the WT and FICA taxes is $212,921.59 with interest, (including FUTA).

 The FUTA taxes for 1975 and 1976 which are claimed amount to $1,171.39, of which $375.99 is claimed due for 1975 and $795.40 for 1976, with interest and penalties. The theories on which the taxes are claimed are those alternate theories already set forth.

 The bank denies liability on any theory.

 Findings of Facts

 With this background explanation we proceed to relate the relationship of Northside to Liberty and the relevant events.

 There is no question that Northside assumed significant control of the affairs of Liberty.

 Northside is located at 100 Federal Street, Pittsburgh, Pennsylvania, and at all relevant times provided banking services to Liberty, which was owned and controlled by Arthur Picone and his wife, Carmella, who were officers and directors of the corporation. Liberty had contracts with steel companies to haul products within the steel mills and at times, owned as many as 100 tractors and dump trailers, usually bought on the installment plan and financed by the sellers.

 The time which is pertinent begins on December 28, 1973, when the bank made its first loan to Liberty in the sum of $175,000.00 and continues through 1974, 1975, and 1976. John Tarn was the president of the bank and was a director of the bank and a director of Liberty as well during 1974, and in 1975 until April of 1975.

 Carl Brandt was an attorney at law who represented the bank and was a director of the bank in which he was a substantial stockholder (12% of the outstanding shares). He was also a director of Liberty and did legal work for Liberty at times. This relationship existed in 1974 and part of 1975.

 The bank was Liberty's Federal Depository bank where Liberty had two accounts, general and payroll, and where it apparently did all of its banking except for a period between July of 1975 and March of 1976, when it kept an account at Equibank in Pittsburgh, of which Tarn and Brandt had no knowledge.

 The first loan, for $175,000.00, was secured by a financing statement filed in January of 1974, which purported to cover and which we find did cover Liberty's present and future accounts receivable. Brandt and Tarn visited Liberty's terminal before this loan was made and were fully informed of the extent of Liberty's property.

 In April of 1974, Liberty received a short term loan of $100,000.00 from the bank. It was renewed several times and was marked paid in August of 1974, when Liberty received a loan of $90,000.00 from the bank. These loans were secured by Picone's personal assets as well, and no new financial statements were filed covering Liberty's assets.

  Liberty made piecemeal tax payments of $3,000.00 to $5,000.00 through its Northside depository account in May, June, July and August of 1974. It made a payment of about $34,000.00 in November of 1974, about $59,000.00 in April of 1975 and tried to make a payment of $75,500.00 in May of 1975 by check drawn on its depository account. The bank did not honor this check because of insufficient funds. Brandt personally ordered or recommended that the check be dishonored.

 No other tax payments were made by Liberty during 1975 or 1976 except as noted hereinafter.

 Frank Traupman was an accountant and a friend of Brandt's upon whose recommendation he became the accountant for Liberty. He prepared financial statements for Liberty which were presented at the bank's board meetings. At least as early as January 1975 the board at Northside was aware of Liberty's serious financial problems.

 In April of 1975 Tarn no longer served as a director of Liberty. He apparently resigned.

 In May of 1975 Liberty's situation had not improved. Only $40,000.00 of the original $175,000.00 loan had been repaid and the general account was in overdraft status and had been since April of 1975. This condition continued until December 1975 when the account was closed. During this period, April to December 1975, pursuant to bank policy, no statements or cancelled checks were sent to Liberty.

 In May of 1975, Northside approved another loan of $300,000.00 conditioned upon, inter alia, Liberty paying payroll taxes due and submitting proof that it was paying its current taxes. We refer, of course, to the payroll taxes.

 In June of 1975 Brandt wrote to Liberty, however, stating that the $300,000.00 loan would not be completed due to Liberty's inability to meet the loan conditions as evidenced by the check for $75,500.00, which could not be cleared. At the same time the officers of Northside had second thoughts about the loan because it clearly exceeded its state legal lending limit.

 At about the same time, June of 1975, Traupman and Picone met with George Tomchik, the local IRS agent in charge of payroll tax collection, to negotiate a settlement and payment schedule because Liberty was in serious default. The sum owed at this time approximated $250,000.00.

 In early July 1975, an agreement was reached with Tomchik. Two $25,000.00 payments were to be made forthwith and monthly payments of $17,100.00 were to be sent directly to Tomchik until the back taxes were paid in full. At the same time Liberty was to make its regular payments as they accrued in the regular manner through the Northside depository account.

 Northside received a copy of the agreement upon its completion and execution.

 But Liberty's condition was becoming worse. Northside, hampered by its legal lending limit, solicited Equibank to take over and lend Liberty $500,000.00 which would pay off Northside and the taxes and presumably, put Liberty on its feet.

 From July of 1975 onward there was little or no use made of Liberty's general account. All checks of whatever nature were written on the payroll account but in early August of 1975, it also went into overdraft status and remained in that state (except for a brief period in December 1975) until the bank closed Liberty at the end of February, 1976, and prepared to liquidate assets.

 Following the agreement with Tomchik in July of 1975, the bank honored the two $25,000.00 checks (both in July) and seven checks for $17,100.00 each (August 1975 to February 1976.) These checks were sent directly to Tomchik. Northside also honored payroll tax checks in the regular manner, as Federal's depository bank, until December 31, 1975. These checks were once again for piecemeal payments and all constituted overdrafts. Checks presented in January and February of 1976 were not honored except the ones for $17,100.00.

  In late August of 1975, the bank filed confessed judgments against Liberty in the amounts of $135,000.00, the balance of the original $175,000.00 loan, and for the $90,000.00 loan. The judgments remained open and were not executed on until after Liberty was closed. Northside's Exhibit V shows that the judgments were satisfied from Picone's assets, not from accounts receivable.

 In August of 1975, Tarn or William Schnebel, a vice president of Northside, began to inspect virtually every check drawn on Liberty's payroll account as they came through. Overdrafts were made known at director's meetings and were listed on an overdraft list distributed to bank officers.

 At about this time Liberty began making deposits in an account at Equibank and deposits in Northside decreased. This was noticed at Northside.

 Northside began to selectively honor or dishonor Liberty's checks. All payroll checks were honored, checks to Tomchik were honored and checks to customers necessary to keep Liberty in business were honored. From October of 1975 onward a bookkeeper at Liberty would call Tarn and tell him which checks had to be honored. Tarn would initial some checks, indicating that they could be honored. About 22 checks were thus initialed.

 On September 8, 1975, the government filed a tax lien for $15,234.58 for the Third quarter of 1974 payroll taxes.

 On October 8, 1975, another tax lien was filed for $82,754.41 for the Second quarter of 1975. Other liens were filed later on as will be mentioned hereinafter.

 On November 12, 1975, after discussions with Picone, Northside directed Picone to instruct his major customers to send their payments (Liberty's accounts receivable) directly to the bank. This was done. A special bank account was opened and a bank officer was directed to manage the account.

 In mid-November, Brandt resigned as a director of Liberty.

 On November 18, 1975, the bank received a report on Liberty and Picone listing all property, all judgments, mortgages, and tax liens.

 On December 12, 1975, Northside converted Liberty's overdrafts into a loan for $250,000.00. For a short period following this loan, the payroll account was not in overdraft status. Northside, at this time, also released Liberty's bank statements and cancelled checks.

 On December 17, 1975, Equibank notified Northside that it would not make the loan for $500,000.00 which had been requested.

 On December 18, 1975, another financing statement was filed covering certain of Liberty's P.U.C. certificates to help secure the loan for the $250,000.00. About $42,000.00 of the $250,000.00 loan was repaid before Liberty was closed.

 On December 22, 1975, Northside filed another financing statement covering more P.U.C. certificates and on January 28, 1976, another such statement was filed covering still more P.U.C. certificates and "all equipment, machinery, inventory and supplies including all office furniture and equipment and future additions thereto." On January 30, 1976, another such certificate was filed covering still more P.U.C. certificates.

 On February 6, 1976, Brandt wrote to Equibank and rebuked Equibank for leading Northside to believe that the loan would be granted. He said "We now realize that we made a mistake in trying to carry these obligations to a point that exceeded our lending limit but we felt that commitments made by officials of a prominent banking organization would be kept and that the problem would be solved." (Plf.'s Exh. No. 16).

 On Friday, February 27, 1976, Northside closed Liberty. In due course all equipment and inventory was sold and the proceeds distributed (See Northside Exh. V). When the closedown occurred, Liberty's debt to Northside was between $400,000.00 and $650,000.00. In the first quarter of 1976 overdrafts, alone, came to about $130,000.00. Of this amount, $124,000.00 represented overdraft payroll checks.

  On Monday, March 2, 1976, Picone called Tomchik to advise that he had been closed. Tomchik called Tarn and Robert Wagner, a member of Brandt's law firm and an attorney for Northside, to inquire. Tarn informed Tomchik that the tax payments for January and February 1976 had not been honored because Liberty's account had been in overdraft status. Wagner gave Tomchik the same advice.

 Northside continued to collect and distribute Liberty's accounts receivable.

 From November 1, 1975 to December 31, 1975, Northside received $359,039.23 in accounts receivable; from January 1, 1976 to February 29, 1976, receipts were $396,399.55, and from March 1, 1976 to the date of trial, $105,757.52. The bank has also collected in liquidation of Liberty's property, $40,100.72 in which, it admits, it had no security interest.

 There follows an analysis of the government's assessments and the dates of filing liens and the balances due. The bank does not contest the assessment dates, the filing dates or the balances due. It simply defends that it is not liable under any of the theories advanced: Type Date Of Date Of Notice Of Tax Assessment Amount Balance Of Tax Lien* 7409 WT-FICA 4/7/75 $76,416,84(T) $15,234.58 9/ 8/75 (3rd Qtr. '74) 2,142.51(FTP) 1,867.60(I) 6/23/75 357.08(FTP) 512.90(I) 9/ 1/75 754.26(DHC) 7506 8/11/75 78,610.66(T) 82,754.41 10/ 8/75(2d Qtr. '75 WT-FICA 3,930.53(FTD) 213.22(I) 7509 2/23/76 76,845.08(T) 24,194.67 4/ 7/76 (3d Qtr. '75) WT-FICA 1,091.77(FTP) 5/ 7/76 7512 4/ 5/76 55,708.42(T) 39,592.24 4/12/76 (4th Qtr. '75) WT-FICA 2,785.42(FTD) 5/ 7/76 179.90(FTP) 62.10(I) 581.70(DHC) 7603 5/11/76 47,495.34(T) 49,974.30 5/20/76 (1st Qtr. '76) WT-FICA 2,374.77(FTD) 7/ 9/76 100.19(I) 7512 3/ 8/76 2,516.68(T) 375.99 FUTA 9/12/77 337.78(T) (1975) 38.21(I) 7612 5/11/76 795.40(T) 795.40 5/20/76 FUTA 7/ 9/76 (1976) TOTAL ** $212,921.59


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